Nontraditional board candidates made headway in 2017

According to a new report from the EY Center for Board Matters, 54% of the 2017 class of directors of Fortune 100 companies served in non-CEO roles and 40% were female. More than half of the Fortune 100 added at least one independent director, slightly less than in 2016, but together, over the two-year period, over 80% of the Fortune 100 added at least one independent director. The result was that, taking director exits into account, “nearly all of the companies experienced some type of change in board composition during this period.” The EY Center’s associate director told the WSJ that the report showed “‘an increase in board diversity along the different dimensions of gender, age, ethnicity and in some cases socioeconomic background,’…. That means demand is growing for people who can offer ‘a more nuanced, multidimensional look’ at what is… happening with regard to consumer demographics, disruptive technology and workforce management, among other areas, she said. ‘The consensus is the best way to provide for boards to be able to see around corners, to ask the right critical questions, to get to the best answer possible, is to have a board that has the right mix of skills, expertise, background and perspective….There’s more openness to considering more and different perspectives.’”

According to a new report from the EY Center for Board Matters, 54% of the 2017 class of directors of Fortune 100 companies served in non-CEO roles and 40% were female. More than half of the Fortune 100 added at least one independent director, slightly less than in 2016, but together, over the two-year period, over 80% of the Fortune 100 added at least one independent director. The result was that, taking director exits into account, “nearly all of the companies experienced some type of change in board composition during this period.” The EY Center’s associate director told the WSJ that the report showed “‘an increase in board diversity along the different dimensions of gender, age, ethnicity and in some cases socioeconomic background,’…. That means demand is growing for people who can offer ‘a more nuanced, multidimensional look’ at what is… happening with regard to consumer demographics, disruptive technology and workforce management, among other areas, she said. ‘The consensus is the best way to provide for boards to be able to see around corners, to ask the right critical questions, to get to the best answer possible, is to have a board that has the right mix of skills, expertise, background and perspective….There’s more openness to considering more and different perspectives.’”

EY’s study involved a review of proxy statements for the Fortune 100 for the 2017 class of directors as well as, for comparative purposes, proxy statements for the same 83 companies’ class of 2016 directors. EY suggests that boards are seeking more diverse candidates that offer “a range of functional expertise, including on complex, evolving areas such as digital transformation, e-commerce, public policy, regulation and talent management,” with the result that “boards are increasingly considering highly qualified, nontraditional candidates, such as non-CEOs, as well as individuals from a wider range of backgrounds.”

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Some of these attitude shifts may reflect responses to pressures from institutional shareholders. For example, asset manager BlackRock’s 2018 Proxy Voting Guidelines for U.S. Securities indicated that directors should have diverse experience and competencies to effectively oversee the company’s long-term strategy. As discussed in this PubCo post, BlackRock indicated that it expected to see at least two women on each board. Note that, in the past, BlackRock has frequently put its vote where its mouth is, having voted in favor of a number of proposals for board diversity (see this PubCo post); in its Investment Stewardship Report for Q2 2017, BlackRock indicated that, in the second quarter, it supported eight out of nine shareholder proposals that requested the adoption of a policy on board diversity or disclosure around plans to increase board diversity. (See this PubCo post.) And, in 2017, State Street Global Advisors announced that it was “calling on the more than 3,500 companies [in which] State Street invests on behalf of clients, representing more than $30 trillion in market capitalization to take intentional steps to increase the number of women on their corporate boards.” According to State Street’s president and CEO, diversity is important to good governance: “A key contributor to effective independent board leadership is diversity of thought, which requires directors with different skills, backgrounds and expertise.” Although State Street’s preferred approach was to encourage change through active engagement, it advised that it could well use stronger measures, including voting against directors. (See this PubCo post.) Also in 2017, NYC Comptroller Scott Stringer, who oversees the NYC pension funds, launched a new campaign that called on the boards of 151 U.S. companies—80% of which are in the S&P 500—“to disclose the race and gender of their directors, along with board members’ skills, in a standardized ‘matrix’ format—and to enter into a dialogue regarding their board’s ‘refreshment’ process.” Stringer contended that this level of transparency would “push more boards to be diverse and independent,” positioning them to “deliver better long-term returns for investors.” According to the press release, Stringer and the pension funds “are pressing companies to commit to working with them and other large, long-term shareowners to identify suitable independent candidates — including ones that bring diverse perspectives and other skills, such as climate expertise, to the boardroom.” (See this PubCo post.)

Corporate finance and accounting was ranked the number one most common area of director skill and expertise identified by companies for the director class of 2017, up from a ranking of fifth in 2016. Coming in second was expertise in international business for the 2017 class, falling from first place in the prior year. Qualifications in government, public policy and other regulatory issues were ranked third for the 2017 class, up from eighth place in the preceding year. Expertise in technology remained at a fourth place ranking—one to watch for next year, together with expertise in risk oversight, in light of the current focus on cybersecurity risk—followed by expertise in marketing and business development (up from fifth place in 2016); operations, manufacturing and supply chain (up from tenth place); transactional finance (up from eleventh place); industry expertise (same as in 2016); board service and corporate governance (down to a tie for seventh place from second place in 2016); and risk oversight (down one place to eighth from a ninth place ranking in 2016). Interestingly, expertise in corporate strategy fell off the charts this year from third place in 2016.

Here are some of EY’s other key findings:

72% of companies reviewed identified gender, race or ethnicity as factor in identifying candidates (compared with 64% in 2016);

63% used graphics to highlight elements of diversity (compared with 48% in 2016);

23% included a board skills matrix (up from 20% in 2016);

55% added at least one new independent director (a decline compared with 59% in 2016);

30% added two or more new directors (compared with 45% in 2016);

44% of the new class was assigned to the audit committee (compared to 41% for 2016), with 63% designated as “audit committee financial experts” (compared to 59% in 2016);

24% were assigned to the comp committee (25% in 2016) and 33% assigned to the nominating and corporate governance committee (34% in 2016).

54% of the 2017 director class served in non-CEO roles (representing an increase of three percentage points from 51% in 2016), such as other executive roles (40%) or non-corporate roles (14%) including academia, scientific organizations, nonprofits, government, military, etc.;

30% (approx.) had not previously served on a board, about the same as for the prior year;

40% of the 2017 class were women, but overall, the proportion of women directors was relatively unchanged, with women directors in 2017 averaging 28% board representation compared to 27% in 2016.

The average ages for women and men were about the same, with women directors averaging 57 compared to 58 for men;

Where director qualifications were disclosed, over one-half of the women in the 2017 director class had expertise in corporate finance and accounting, marketing and business development, or risk oversight, while over one-third had expertise in government, public policy and regulatory; industry; operations, manufacturing and supply chain; or technology;

The demographic is shifting younger, with the average age of the 2017 director class at 57, compared to 63 for incumbents and 68 for exiting directors; and

15% of the 2017 new class were under 50 years of age (compared with 9% for 2016), 37% were in the 50 to 59 bracket (compared to 47% for 2016), 48% were in the 60 to 67 bracket (compared to 42% for 2016) and none were over 68 (compared to 2% for 2016).

Notwithstanding the trend toward more diverse perspectives, EY observes that “these developments may be slow to manifest. For example, consider that the average Fortune 100 board has 10 seats. In this context, the addition of a single new director is unlikely to dramatically shift averages in terms of gender diversity, age, tenure or other considerations. That said, whether a board’s pace of change is sufficient depends on a company’s specific circumstances and evolving board oversight needs. Boards should challenge their approach to refreshment, asking whether they are meeting the company’s diversity, strategy and risk oversight needs. Waiting for an open seat to nominate a diverse candidate may mean waiting for the value that diversity could bring.”

In this context, EY suggested the following questions for the board to consider:

“How is the company aligning the skills of its directors—and that of the full board—to the company’s long-term strategy through board refreshment and succession planning efforts?

How is the company providing voluntary disclosures around its approach in these areas? Does the company’s pool of director candidates challenge traditional search norms such as title, age, industry and geography?

How is the company addressing growing investor and stakeholder attention to board diversity, and is the company providing disclosure around the diversity of the board—defined as including considerations such as age, gender, race, ethnicity, nationality—in addition to skills and expertise?”

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